Monetary policy transmission mechanisms and currency unions: A vector error correction approach to a Trans-Tasman currency union
AbstractTransmission mechanisms are the channels through which monetary policy affects macroeconomic variables, such as GDP and inflation. Differences in transmission mechanisms can generate asymmetric behaviour among currency union partners when they experience shocks. This has the potential to widen existing cyclical variation between members of a currency union. We examine the similarity of transmission mechanisms in New Zealand and Australia and consider the implications this has for a currency union between the two economies. We examine these using the Vector Error Correction methodology. While conclusions using this methodology for New Zealand and Australia remain quite fragile, our analysis nevertheless suggests that the transmission mechanisms in New Zealand and Australia do display many similarities. In particular the adjustments of both GDP and the CPI in response to monetary policy shocks appear to be very similar. However there are some differences in terms of the size of the responses of some of the variables to identical monetary policy shocks. In a currency union with a different exchange rate pattern and with different monetary policy shocks, New Zealand may experience some new challenges.
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Bibliographic InfoPaper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2003/04.
Date of creation: May 2003
Date of revision:
Other versions of this item:
- Haug, Alfred A. & Karagedikli, Ozer & Ranchhod, Satish, 2005. "Monetary policy transmission mechanisms and currency unions: A vector error correction approach to a Trans-Tasman currency union," Journal of Policy Modeling, Elsevier, vol. 27(1), pages 55-74, February.
- Alfred A. Haug & Ozer Karagedikli & Satish Ranchhod, 2003. "Monetary policy transmission mechanisms and currency unions A vector error correction approach to a Trans-Tasman currency union," Working Papers 2003_2, York University, Department of Economics.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-06-16 (All new papers)
- NEP-IFN-2003-07-21 (International Finance)
- NEP-MON-2003-06-16 (Monetary Economics)
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